If you look at the dictionary meaning of wealth, it is abundance. When you talk about wealth in relation to money it means the abundance of wealth and wealth creation is focused on making this abundance a reality. For you and me, assets can be defined as our total assets, be it real estate, cash, gold, stocks, mutual fund units etc. After deducting any liability such as outstanding debt.
But money is also a relative term. Whether a person is rich or not depends on what standards we set for ourselves based on our dreams. So, you can call yourself rich if you are good enough to fulfill all your dreams. For example, you may dream of owning an apple orchard in Shimla or a 4-BHK flat in South Delhi. A substantial amount of money will be required to make these dreams come true. So, if you do not have enough money to fulfill these dreams, then you have to focus on increasing your wealth to get closer to achieving your financial goals or dreams.
In this blog, we will discuss what making money What exactly it means, its importance, and some strategies that can help in the successful creation of wealth.
What is wealth creation?
One cannot create wealth just by earning more money. You have to invest your savings to create a parallel flow of income. This process of investing your saved money to grow your wealth by choosing investments that align with your financial goals is called wealth creation.
In order to create sufficient wealth, apart from choosing the right investments, you also need to give your investments enough time to grow. You need to maximize the benefits of compounding by investing early in life. Beginners have the opportunity to stay invested for a long time, making it easier for them to reach various financial goals.
Another way to ensure that you achieve your wealth creation goals is to increase your investments in line with the increase in your income. If you are salaried, you will get annual increment. If you increase your monthly investments every year in the same proportion as your annual growth, you will be able to save significantly more. after all, How much you invest matters more than your return Especially when you are starting your investment journey.
Since the type of goal and time horizon vary from person to person, there is no one guaranteed way to make money. For example, if you are investing for the long term, equity-oriented investments are more suitable than debt-oriented investments. On the other hand, debt and hybrid mutual funds are more suitable for short and medium term investment goals.
What is the purpose of wealth creation?
the importance of making money A statement made by veteran investor Warren Buffett can be summed up as – “If you can’t find a way to earn money while you sleep, you have to work till you dieWhat he means by this statement is that one of the key objectives of wealth creation is the ability to generate wealth passively by investing previously earned money. Thus savings grow over time and the investor’s wealth increases.
At the most basic level, making money Grow your money to achieve various short, medium and long term financial goals. Short-term financial goals could mean saving enough money for a vacation or buying the latest iPhone. These are generally goals that need to be achieved within a period of 3 years or less.
Medium term goals are generally investment goals that have to be achieved within a period of 3 to 5 years. examples of such wealth creation goal This can include saving for a new car, saving for a down payment for a new home, etc.
On the other hand, long-term goals like ensuring adequate retirement savings can easily have an investment horizon that extends over many years and even decades. In this case, you need to ensure that you create enough wealth during your working life to meet your post-retirement financial needs.
Now since there can be multiple objectives of wealth creation with different time horizons, you have to implement different strategies to achieve such diverse goals.
How to choose the right investment to create wealth
As an investor, you can have access to a variety of investment options. But just as each tool in a toolbox is suited for a specific task, the same is true for investments. For example, if you are saving for a financial goal that you need to achieve within 6 months, you need to prioritize the safety of the amount invested over the potential return you will get from the investment. Hence there are low volatility options like liquid funds and fixed deposits Best investments for short term investment goals,
But even though the safety of your investments is important, you need to prioritize the development of your investments to achieve long-term financial goals. A common example of this mistake when saving for long-term goals like retirement or a dream home is opting for fixed return investments like fixed deposits (FDs) over equity-oriented investments like flexicap funds.
To understand how people err on this side, let’s consider an example. Suppose, you have calculated that you need Rs 4 crore to save your dream home and you have 20 years to achieve this goal. Currently, the annual interest rates from FDs are around 6%. On the other hand, over the last 15 years, Flexicap Funds have provided an average annual return of around 12%. Assuming that the average annual return from these investments will be maintained for the next 20 years, the table below shows the monthly investments you will need to reach your financial goal:
|Monthly investment required to save Rs 4 crore in 20 years|
|Fixed deposit||Flexicap Fund|
|Average Annual Return/Interest Rate (per annum)||6%.||12%|
|investment period||20 years||20 years|
|Monthly investment required||Rs.86,150||Rs.40,035|
As you can see, if you rely only on FDs to reach your goal, you will have to save Rs 86,150 every month for the next 20 years and that will be a daunting task. Whereas, if you invest in Flexicap Fund, your investment requirement will come down to a more attainable Rs.40,035 per month.
Hence, in this scenario, FD is not a suitable tool to achieve long-term financial goals, even if its returns remain the same throughout the investment tenure. As a result, if you try to use only fixed return instruments for wealth creation over the long term, it will require significantly more effort on your part. This is why you need to choose suitable investment options based on your specific wealth creation goal.
How to plan for wealth creation?
Since every investor is unique with different savings potential, financial goals, risk appetite, etc., no one strategy for wealth creation can be considered suitable for all investors. But there are some basic rules of wealth creation that all investors should follow:
- Save as much as you can by cutting avoidable expenses
- Increase investments regularly as your income increases
- Plan your exit as you get closer to your goal
For more details on how you can plan your wealth creation journey, please read our blog – Follow 4 steps to generate money,
Wealth creation is a continuous process. You need to make a plan and stick to it so that you can accomplish all your goals. Also there is no one-size-fits-all wealth creation solution as each person has unique goals, risk tolerance, etc. Hence, choosing the right investment that can help you achieve your goals plays a vital role in ensuring that you succeed in building wealth over time.
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